Chesapeake Energy Corp. increased the amount of its most recent loan on Tuesday even as the company's debt rating was downgraded.
The company also reported that it had nearly maxed out its $4 billion revolving credit before obtaining the new loan.
The Oklahoma City energy company said it increased its previously announced senior unsecured loan from Goldman Sachs Bank USA and Jefferies Group Inc. to $4 billion, up from the $3 billion announced Friday and discussed Monday on a conference call with analysts.
The company attributed the increase to strong demand from investors willing to buy the debt.
“We appreciate this strong vote of confidence from investors,” Chesapeake CEO Aubrey McClendon said in a statement Tuesday. “As discussed in yesterday's conference call, this will give us greatly enhanced financial flexibility to execute our planned asset sales from a position of strength and to complete our transformation from a natural gas-focused producer to a more balanced liquids-focused producer.”
The announcement came hours after credit ratings agency Standard & Poor's downgraded Chesapeake's senior unsecured debt to “BB-,” three levels below investment grade, in part because of fears that Chesapeake's debt levels could climb high enough to trigger default on some loans.
Lower debt ratings can make it more difficult and more expensive for companies to borrow money.
“The downgrade reflects mounting turmoil stemming from revelations that underscore shortcomings in Chesapeake's corporate governance practices, covenant concerns, and the likelihood Chesapeake will face an even wider gap between its operating cash flow and planned capital expenditures than we had previously anticipated,” S&P stated in its report Tuesday.
The ratings agency said it was most concerned with requirements included in some of Chesapeake's existing loans that the company's debt cannot climb above a certain level relative to earnings.
The loan covenants state that Chesapeake's debt cannot exceed four times its lagging 12-month earnings before interest, taxes, depreciation and amortization (EBITDA).
“We believe that if EBITDA remains at the weak level of the first quarter ($838 million) or worse, as we anticipate, without a significant reduction in reported total debt from the level at March 31, 2012 ($13.1 billion), Chesapeake could breach this covenant within the next three quarters,” S&P wrote Tuesday.
Bernstein Research analyst Bob Brackett reached a similar conclusion in his analyst report issued Monday.
Brackett said Chesapeake's ratio currently is about three times lagging EBITDA.
“Due to the combination of anticipated producing asset sales decreasing EBITDA, along with lower natural gas prices likely causing upcoming quarters' EBITDA to be below last year's counterparts, we believe the ratio has the potential to approach, if not exceed, 4x (the threshold) in the third or fourth quarter of this year,” the report states.
Chesapeake has previously disclosed in regulatory filings that too much debt could trigger a domino effect that could cause its revolving credit facility and “a significant portion of our senior notes indebtedness” to be “declared immediately due and payable.”
Chesapeake has said it plans to pay off much of the $4 billion loan by the end of the year with proceeds from its planned $9 billion to $11.5 billion in asset sales.
“Chesapeake is caught in a real squeeze right now,” said Steven Agee, dean of Oklahoma City University's Meinders School of Business. “These asset sales they're looking at are predicated upon certain thresholds being met for the price of natural gas. If those prices aren't sufficient to warrant the price they've talked about in terms of consummating the sale, the buyer is naturally going to be cautious because the prices are so low.”
The company said it will receive about $3.8 billion from the loan after paying fees, saying that with the loan, its cash on hand and the remaining balance on its revolving credit facility, it now has $4.7 billion available. Chesapeake has said it had $438 million in cash as of March 31.
“I don't think any of us recognized how precarious a position they were in until Friday,” said Jake Dollarhide, CEO of Longbow Asset Management Co. in Tulsa. “If they hadn't gotten the loan, I think the stock would have traded under $10 Monday on fears of financial worries.”
Even with the loan, Chesapeake's stock price has suffered, losing another 87 cents, or 5.6 percent on Tuesday to close at $14.65. The stock price recovered 11 cents, or less than 1 percent, in after-hours trading after Chesapeake said it increased the size of the most recent loan.
The company has said the loan will give it the cash flow and negotiating strength it needs to get the best prices for its planned asset sales.
“It gives them a really good chance,” Dollarhide said.